Brokerage house SMC has provided a rating of 1/5 for the initial public offering (IPO) of Fatpipe Networks (India). The investment rationale and the outlook provided by the brokerage house is as follows:
Valuation:
Considering the P/E valuation, the company is trading at pre issue P/E of 15.40x on the lower side of the band and 15.97x on the higher side of the band of its annualised FY10 earnings of Rs.5.32. Looking at the post issue valuation, the company is trading at P/E of 22.22 times on the lower side and 23.09 times on the higher side of its post issue annualised FY10 earnings of Rs 3.8.At its P/B ratio it trades at 2.98 and 3.09 multiples of the lower and higher band of its pre issue book value of Rs 27.55 and 1.82x and 1.88x on the lower and higher side of its post issue book value of Rs 45.18 respectively.
Outlook:
Acquisition of business/company, establishing marketing offices and research and
development process across globe are the major objects of the issue. However company has not yet taken initial steps for it. Any delay or misidentification of the potential acquisition could impede one of the key business strategies, restrict the international growth and have a material adverse effect on the Company`s business, financial condition and results of operations. Moreover being a small cap company with post issue Mcap of just 1,600 million and revenue growth of 9% compound annual growth rate (CAGR) the stocks seems to be quite expensive on the price earning multiple of Rs 22-23 post issue. The promoters holding at 37% pre issue and 26% post issue also gives a cautionary bell.